Report for the Hearing in Case C-20/91

I — Facts and written procedure

1. Facts and legal background

1. On 15 August 1978, Mr de Jong, a building contractor, purchased a plot of land with an existing building. Turnover tax was not paid in respect of that transaction.

2. On 30 July 1979, he sold about half of the plot and demolished the building. He then built two dwellings, one — completed in 1980 — on the part of the land which had been sold, for the purchaser of it, and the other — completed in 1981 — for himself on the other part of the land.

3. Mr de Jong deducted the turnover tax charged to him on the goods and services supplied for construction of the houses. When he put the house built for himself to private use, he included in his turnover tax return by way of liability to tax an amount equal to the input tax previously deducted by him in connection with the building works.

4. Taking the view that the house and the land should be treated as a single unit and that the basis of assessment should therefore also include the value of the land, the Netherlands Tax Administration reassessed the turnover tax due in respect of the value of the plot.

5. Mr de Jong took the view that in such circumstances the land and the building should not be regarded as a unit and that the price of the land should not be included in the basis of assessment. He relied on Article 3(l)(g) of the Netherlands Law on Turnover Taxes which provides: Mr de Jong considers that the land has always formed part of his private assets and did not become part of his business assets when the house was built.

‘The following shall constitute supplies of goods:

...

g) The use of goods for non-business purposes, following which the goods in question cease to form part of the assets of the undertaking.’

6. The Gerechtshof te Amsterdam (Regional Court of Appeal, Amsterdam), to which Mr de Jong appealed, upheld the view of the Netherlands Tax Administration on the ground that the land was inseparably linked with the house built on it.

7. Mr de Jong sought a judicial review of the judgment of the Gerechtshof, contending that that court had incorrectly determined the basis of assessment referred to in Article 8(4) of the Netherlands Law on Turnover Tax. That article provides:

‘... the remuneration shall be equal to the amount, excluding turnover tax, which would have had to be paid for the goods if they had been purchased or produced in the state in which they were at the time of the supply’.

8. The Hoge Raad der Nederlanden (Netherlands Supreme Court), considering that the application of Article 3(l)(g), in conjunction with Article 8(4), of the Netherlands Law on Turnover Tax had to conform with Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, hereinafter ‘the Sixth Directive’), considers that an interpretation of Articles 5(6) and HA(l)(b) of the Sixth VAT Directive is necessary.

9. Article 5(6) of the Sixth Directive provides:

‘The application by a taxable person of goods forming part of his business assets for his private use ..., where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration ...’.

10. Under Article HA(l)(b) of the Sixth Directive, the basis of assessment for the transactions referred to in Article 5(6) is made up of

‘the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time of supply’.

11. The Hoge Raad therefore decided to stay the proceedings and to refer to the Court of Justice for a preliminary ruling under Article 177 of the EEC Treaty the following questions:

‘1. Is Article 5(6) of the Sixth Directive to be interpreted as meaning that a taxable person (a building contractor) who acquires land solely for his private use and subsequently erects on that land in the pursuit of his business a building (a dwelling) and finally puts the building together with the land on which it stands and possibly the surrounding land to his private use has applied goods forming part of his business assets for his private use within the meaning of the directive not only as regards the building, but as regards the building together with the land on which it stands and possibly the surrounding land?

2. Is the condition laid down in Article 5(6) of the Sixth Directive regarding the assimilation of the application of goods forming part of business assets for private use to a supply that the value added tax on the goods in question or the component parts thereof has been wholly or partly deductible to be understood as meaning that where goods forming part of business assets have been applied for private use in the form of immovable property, consisting of a building and the land on which it stands and possibly the surrounding land, if there is no deductibility as regards the land there is no supply of goods either as regards the immovable property as a whole or as regards a part thereof, that is, the building?

3. If the answer to the second question is that the whole immovable property constitutes a supply of goods as provided for in Article 5(6) of the Sixth Directive, is Article 11 A(l)(b) of the directive to be interpreted as meaning that the taxable amount laid down therein must be based on the cost price of the whole immovable property, that is to say including the cost price of the land, or is the amount limited to the part of the cost price with regard to which value added tax is deductible?’

2. Procedure before the Court

12. The order for reference was received at the Court Registry on 23 January 1991.

13. Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted by the Netherlands Government, represented by B.R. Bot, Secretary-General in the Ministry of Foreign Affairs, by the German Government, represented by E. Roder, acting as Agent, and by the Commission of the European Communities, represented by J. Føns Buhl and B.J. Drijber, of its Legal Service, acting as Agents.

14. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided, pursuant to Article 95 of the Rules of Procedure, to assign the case to the Third Chamber and to open the oral procedure without any preparatory inquiry.

II — Written observations submitted to the court

15. The Netherhnds Government considers that, by virtue of its purpose and scope, Article 5(6) of the Sixth Directive must be applied in such a way that a taxable person is — approximately — in the same tax position as any other private consumer as far as his private use is concerned. With regard to the case of a building contractor who, in pursuit of his business, constructs a dwelling for himself on a plot acquired for private purposes, that means that the tax treatment applied to him must correspond as far as possible to that applied to a private consumer who has a dwelling built on his own plot. For that purpose, the Netherlands Government contends that turnover tax should be levied in respect of the dwelling only.

16. It considers that in theory three approaches are possible regarding collection of turnover tax in respect of the dwelling only.

17. The first approach, to which the first preliminary question refers, takes as the starting point for the application of Article 5(6) of the Sixth Directive the view that the only item of goods forming part of a building constructor's business assets that he applies for private use is the dwelling, not the land. According to the Netherlands Government, that approach must be rejected since the construction of a dwelling on land made available for that purpose gives rise — as far as turnover tax is concerned — to a new immovable property, namely the de facto unit comprising the dwelling, the land on which it stands and the land surrounding the dwelling, and that that unit derives, as such, from the building contractor's pursuit of his business activity. Consequently, the Netherlands Government proposes that the first question be answered in the affirmative, to the effect that Article 5(6) of the Sixth Directive cannot be interpreted as meaning that, in the circumstances described by the national court, the only item of goods forming part of the building contractor's business assets which was applied for his private use is the dwelling, not the unit comprising the dwelling, the land on which it stands and possibly the remaining land surrounding it.

18. The second approach, with which the second preliminary question is concerned, takes as the starting point for the application of Article 5(6) of the Sixth Directive the view that the precondition for entitlement to full or partial deduction of VAT is fulfilled only in respect of the dwelling. The Netherlands Government considers that the condition laid down in Article 5(6) of the Sixth Directive corresponds, to a considerable degree, to the condition laid down in Article 6(2)(a) of the same directive, which is also intended to ensure that turnover tax is not charged on a business asset used for private purposes. In that context, it points out that, in its judgment in Case 50/88 Kühne v Finanzamt München III [1989] ECR 1925, the Court interpreted Article 6(2)(a) of the Sixth Directive as ‘precluding taxation of the depreciation of business goods in respect of their private use where the VAT on such goods was not deductible because they were purchased from a nontaxable person’. That interpretation, inspired by the principle that the tax must be neutral, can, in the view of the Netherlands Government, also be applied to the interpretation of Article 5(6) of the Sixth Directive. In taking that approach, the Netherlands Government considers that the condition laid down in Article 5(6) of the Sixth Directive must be interpreted as meaning that the components of the asset in respect of which no right to deduct VAT arises are not taken into account in calculating the tax. In the present case, that means that only the dwelling is to be taken into account in this case, in calculating the tax, and not the land.

19. However, the Netherlands Government points out that that approach cannot be applied in all cases where the taxable person has not had the benefit of deduction of the VAT in respect of the business assets applied for private use. It is apparent from the judgment of the Court in Case C-165/88 ORO and Concerto [1989] ECR 4081, in conjunction with the judgment in Kühne, cited above, that the non-application of Article 5(6) of the Sixth Directive is appropriate only in cases where the taxable person purchased the asset in question, which did not give rise to deduction of VAT, with no other purpose in mind than to use it — wholly or in part — for private purposes, and not solely for business purposes. It is therefore necessary to establish in each case whether the asset in question was actually acquired solely for private purposes.

20. Consequently, the Netherlands Government suggests that it be stated in reply to the second question that the condition contained in Article 5(6) of the Sixth Directive must be taken to mean that, in the circumstances described by the national court, there is a supply of a dwelling. Neither the letter nor the scope and purpose of Article 5(6) provide any support for an affirmative answer to the second preliminary question. It is for the national court to decide in each individual case, on its facts, whether the land in question was actually purchased for no purpose other than private use.

21. The third approach, with which the third preliminary question is concerned, takes as the starting point for the application of Article HA(l)(b) of the Sixth Directive the view that only the dwelling is included in the basis of assessment defined by that article for calculation of the turnover tax payable in respect of the private use in question. The Netherlands Government is of the opinion that, in view of the answer given to the second preliminary question, it is unnecessary to consider this approach or, therefore, to answer the third preliminary question. It states, however, that if it were to be considered, contrary to the Netherlands Government's view, that Article 5(6) of the Sixth Directive, or the scheme thereof, does not make it possible to apply tax treatment which corresponds as far as possible, to the VAT position of a private consumer who has a house built on his own plot, then it would be necessary to conclude that Article HA(l)(b) of the Sixth Directive similarly provides no basis whatsoever for that approach. The Netherlands Government therefore considers that, if it must be answered, the answer to the third question must be that, in the circumstances described by the national court, the basis of assessment defined by Article HA(l)(b) of the Sixth Directive must — in accordance with the terms of that provision — be the cost price of the immovable property in its entirety.

22. The German Government considers that it is necessary to undertake a general examination of the tax treatment of an application of business assets for private use of the kind referred to in Article 5(6) of the Sixth Directive.

23. It first observes that the taxation of applications of business assets for private purposes under Article 5(6) of the Sixth Directive is intended to accord the same treatment to taxable persons who make supplies to themselves as to final consumers who obtain supplies from third parties. Those who are both businessmen and consumers should not, where the circumstances of consumption are similar, be placed at an advantage or disadvantage by comparison with ‘normal’ final consumers, who are not businessmen and consumers at the same time. That objective of identical treatment should be taken into account in interpreting Article 5(6) of the Sixth Directive.

24. It then draws attention to the fact that, under Article 5(6), the taxation of applications of business assets for private purposes presupposes that the assets in question must previously have formed part of the assets of the undertaking, in other words must have been used for business purposes.

25. In the German Government's opinion, it is for the taxable person to decide whether a particular asset is used for business purposes, although the decision to use it for that purpose must be reflected by specific facts. It is sufficient in that connection for the asset acquired, in so far as it is intended to be used for business purposes, to display a manifest and objective economic link with the economic activities of the taxable person within the meaning of Article 4(2) of the Sixth Directive and to contribute to the furtherance of such activities. In any event, there is no appropriation to business purposes where, having regard to all the circumstances, the asset is acquired solely for nonbusiness purposes or the economic benefit which the business can derive from the intended use is extremely small.

26. If an asset is not used for business purposes, private use of it does not render it subject to VAT under Article 5(6) of the Sixth Directive. Whether or not turnover tax was invoiced at the time of purchase of the asset is of little importance in that regard.

27. On the other hand, the application of an asset to private purposes is always fully subject to turnover tax, even where only part of the asset gave rise to a right of deduction at the time of purchase. That is apparent both from the wording and from the legislative history of Article 5(6) of the Sixth Directive. Indeed, the proposal for a directive of 29 June 1973 (OJ 1973 C 80, p. 1) providing for partial taxation of own consumption (Article 5(3)(a) of the proposal) was expressly rejected when considered by the Council in order to avoid the practical difficulties inherent in it.

28. Applying those conditions to the situation of a taxable person who has erected a building on land belonging to him in order to put it to his own private use, the German Government distinguishes three possible cases:

29. Case A: From the outset, the unbuilt land does not belong to the business but, as a result of a decision regarding its use taken by the taxable person, it forms part of the latter's private assets. In such circumstances, on which the first preliminary question is based, the land cannot, in the view of the German Government, have been removed from the assets of the undertaking. Only the building erected on the land was the subject of an application of business assets for private use of the kind referred to in Article 5(6) of the Sixth Directive.

30. Case B: The unbuilt land belongs to the business as a result of the taxable person's use of it for that purpose. If the taxable person then erects a building on the land with the intention of using it for his own private purposes, the German Government considers that it is upon commencement of construction that the unbuilt land is removed from the assets of the undertaking in the manner envisaged in Article 5(6) of the Sixth Directive. That application for private purposes and the subsequent use for private purposes of the building erected on the land are to be distinguished from each other for tax purposes.

31. Case C: The unbuilt land belongs to the business as a result of the taxable person's use of it for that purpose. He then erects a building on the land with the intention of selling the land and the building on it in pursuit of his business. If, once the building is completed, the taxable person decides not to sell the land and building but to use it as his own private dwelling, an application for private purposes of the land and buildings together takes place at that moment. In such circumstances, to which the second and third preliminary questions relate, the application for private use of the land and buildings together is, in the German Government's view, subject to turnover tax by virtue of Article 5(6) of the Sixth Directive, that being the case whether or not the prior purchase of the unbuilt land gave rise to a right to deduct turnover tax, since the taxable person was able to deduct the tax in respect of erection of the building as an essential component of the land and building together applied for private use. Partial taxation — that is to say, where the land is distinguished from the single item applied to private use (the land and building) — is not lawful.

32. The German Government then observes, in that context, that, since the application to private use of the land and building must be regarded as a single operation, the basis of assessment for it must also be determined in a single operation by virtue of Article HA(l)(b) of the Sixth Directive. By virtue of that provision, the basis of assessment, which in this case is the cost price, comprises not only the cost price of the building but also that of the land.

33. In conclusion, the German Government suggests the following answers to the preliminary questions:

‘(1) Article 5(6) of the Sixth Directive must be interpreted as meaning that a taxable person — namely a building constructor — who acquires land solely for the purpose of putting it to private use and then erects, for private use, a dwelling house in pursuit of his business has removed only the building, and not the land, from his business assets.

2) The condition laid down in Article 5(6) of the Sixth Directive which must be fulfilled for an application for private use to be assimilated to a supply, and according to which the asset in question or the components of it must have given rise to the right to a full or partial deduction of VAT must be construed as meaning that, if a plot of land and buildings have been removed from the assets of a business, even though the land did not give rise to any right of deduction, a supply has been effected of the immovable property in its entirety.

3) In view of the fact that, if a plot of land and buildings have been removed from the assets of the business, even though the land did not give rise to any right of deduction, there is a supply within the meaning of Article 5(6) of the Sixth Directive as regards the immovable property in its entirety, Article HA(l)(b) of the Sixth Directive must be construed as meaning that the basis of assessment referred to therein comprises the cost price of the immovable property in its entirety, including therefore the cost price of the land.’

34. The Commission maintains that two conditions must be fulfilled for Article 5(6) of the Sixth Directive to apply: the application for private use must concern an asset which (i) belongs to the assets of the undertaking and (ii) gave rise to deduction of input tax.

35. According to the Commission, the first condition is not satisfied in the present case. The land in question never formed part of the assets of the business undertaking in question but always belonged to the private assets of the taxable person. Nor did the land become a business asset merely because the taxable person built on it for business purposes. The land could not therefore become a private asset by being removed from the assets of the business.

36. The approach advocated by the Netherlands authorities in the present case is not, in the Commission's view, in conformity with the objective of Article 5(6) of the Sixth Directive, which is to ensure equal treatment as between a taxable person who applies a business asset for private use and a nontaxable person who purchases such an asset. If, for example, the person concerned, instead of building his house himself, had entrusted its construction to a third party, he would similarly have paid VAT only on the price of the construction and not on that of the land and house together.

37. The Commission considers it unnecessary to examine the second condition in detail, but points out in that connection that the building and land must also be considered separately with regard to the deduction of input tax. The values of the two assets cannot be added since they belong — from the tax point of view — to two different persons: the land belongs to the taxable person in his private capacity whereas he supplied the dwelling in his capacity as a taxable person. That interpretation corresponds to that given by the Court to Article 6(2)(a) of the Sixth Directive. By virtue of the latter provision, the use for private purposes of goods forming part of the assets of a business can be taxed only where the goods themselves — and not the expenses relating to the exploitation and maintenance thereof — gave rise to a right to deduct VAT. In its judgment in Kühne, cited above, the Court inferred from this that ‘the tax rules applicable to the supply of business goods must be distinguished from those concerning the taxable expenses incurred for their use and maintenance’ (paragraph 14).

38. Considering that, in the circumstances, it is unnecessary to answer the third question, the Commission suggests the following answers to the first and second preliminary questions:

‘(1) Article 5(6) of the Sixth Directive must be interpreted as meaning that there is no “application by a taxable person of goods forming part of his business assets for his private use” if that asset never formed part of the assets of the taxable person's business.

2) There is no supply within the meaning of Article 5(6) of the Sixth Directive unless it relates to an asset or part of an asset which gave rise to a right to deduct input tax — in the present case, that applies only to the building and not to the land on which it stands.’

M. Zuleeg

Judge-Rapporteur

1 Language of the case: Dutch.